If we were to put the time line of the earth (6.4 billion years) on a 12 month calendar, where 12am, January 1st is day 1 and 11:59, December 31 is the present, the human race would have only existed for 15 minutes. My point, in terms of evolving, we haven’t been around long relative to the big picture. Even more so, for 14.9 of those 15 minutes, we were an agricultural society. My point again, our minds evolved and came to be in an entirely different climate.

How does that apply to investing? I will use an example developed by the great Nassim Taleb, author of ‘The Black Swan’. Think of our agricultural society as place, we will call it ‘mediocristan’ and our industrialized society as ‘extremism’Â. Mediocristan is a place where variances are small and events are more predictable.

Extremism on the other hand, is prone to much more variance and thus entirely more difficult to predict the future with any certainty. Too further explain this point; I will use a stadium full of people as an example. In mediocristan, if you took a stadium full of people and were to measure everyone’s height and say came up with an average of say 5’9. If you then, replace the shortest person in the stadium with the tallest person in the world and recalculated the average, it would still be 5’9 because it’s too large of population to cause much of a variance. Now on to extremism, if you took a stadium full of people and measured a modern day variance, such as personal wealth, what follows is the primary difference between the two societies. Now if you replace any of the people in the stadium with the richest person in the world, the average is going to sky rocket.

The lesson here is that our brains are wired to predict in a society where the variances are small. However, now we live in extremism, where variances are extreme and occur often. No one is guiltier of this malfunction than economists and investors. They try and predict an infinite future, with a finite amount of variables from the past. Then after the fact, out of the pool of economists that predicted outcomes, of course you are going to find those who were right. But never for the reasons they predicted in the first place, although they will claim as such. On the other side, those wrong will point to causes that were unforeseeable and not possible to see coming. Of course, the entirety of our future is unforeseeable.

Improbable events happen all the time and the probability of those events is small. However, we can’t look back and say that the odds of that happening were too small to predict. Although it may be true that the odds of a specific improbable event happening are small, the odds of an improbable event happening in general, is very much probable.

Jonathan Beaton http://www.wejustgraduated.com

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